* ECB sees local regulators supervising most banks
* Strict firewall between monetary and supervisory work
* ECB's Liikanen says broad universal banks still have a role
LONDON, Oct 22 (Reuters) - The European Central Bank will focus on the top 25 firms when it becomes supervisor for all euro zone lenders from next year, ECB Vice President Vitor Constancio said, adding that direct injection of funds into weak banks won't happen before 2014.
In a hearing with British lawmakers, Constancio sought to ease concerns on Monday about the banking union plan that turns the ECB into a powerful regulator as part of efforts to draw a line under the euro zone debt crisis.
Talk of a clash between the ECB's monetary and supervisory roles was wide of the mark, he said.
"I think that this conflict that is mentioned many times is really exaggerated and no central bank will compromise the main role that the central bank has in our economies to care for price stability," he said during a 90-minute grilling via video link to a committee of Britain's upper house in parliament.
He sketched out how a deal European Union leaders agreed last Friday to allow the ECB to supervise banks in the 17-country euro currency area from next year would work.
While he fully expects the ECB to have authority over all the euro zone's 6,000 banks, the Frankurt-based institution would concentrate on the systemically important lenders and delegate routine supervision of the rest to local watchdogs.
"The main division is the centre will directly supervise the 25 odd banking groups and all the rest will be done by national supervisors under the guidance, umbrella, monitoring and definition of practices by the centre," Constancio said.
The top banks would include Deutsche Bank, BNP Paribas, Santander UniCredit.
The ECB would reserve the right to intervene in any euro zone lender when needed. "There is no ambiguity in the system and there is very extensive use of decentralisation," he said.
The ECB is set to formally take up the reins in early 2013 but Constancio said next year will be used for preparatory work.
Effective supervision which would allow the ECB to tap the euro zone's ESM rescue fund to shore up an ailing lender, won't start until 2014, Constancio said.
"Which means that Spain or any other country that has to capitalise banks has to meanwhile do that with their own contribution," he added.
Maintaining price stability will remain the ECB's central priority and there would be no compromise in monetary policy because of the ECB's added supervisory role.
"The firewalls that will exist inside the institution will be respected," Constancio said.
There will be more haggling among EU countries ahead of another EU summit in mid-December to finalise the ECB's detailed role in supervision but the broad outlines are now set, marking a rapid advance in European integration.
The pan-EU European Banking Authority (EBA) will relinquish its euro zone supervisory tasks to the ECB but continue to write the bloc's banking rulebook.
Constancio said the ECB would be just like any other supervisor and required to comply with EBA rules in full.
But the UK worries that euro zone countries collectively will be able to ram through pan-EU rules to their own liking.
"If some reinforcement of protection of minorities is introduced in the voting procedure of the EBA, we would have no objection to that," he said.
Making the ECB a banking supervisor is the first of three steps to creating a fully fledged banking union.
Michel Barnier, the EU's financial services chief, said in Vienna on Monday he will propose the second step next year: a joint agency for shoring up or closing troubled banks, another key element of a banking union.
Constancio said this could include a requirement for banks to issue a minimum amount of "bail in" debt for shoring up its defences when in trouble.
The final step and probably trickiest, a common insurance scheme for all euro zone bank deposits, will take longer, Constancio said.
Constancio said the recent report from fellow ECB member, Erkki Liikanen, who is also governor of the Finnish central bank, offered a very intelligent compromise on how to deal with concerns about banks taking bets with their own money.
A separate panel of UK lawmakers were questioning Liikanen about his report on Monday and he said there was still a role under his proposals for Europe's big universal banks which keep high street and riskier investment banking and trading under one roof.
"Those universal banks that acted with prudence during the crisis have served the economy well. Those that have taken risks, have had difficulties," Liikanen said.